Adobe Risks a 'Death Cross' on Missed Earnings

Adobe Inc. (ADBE) provides software for graphic design, publishing and print production. Most of the company's applications are delivered in its "Creative Cloud." Owning this stock is a play on momentum, not on valuation, as the P/E ratio is elevated at 46.39.

The stock closed Monday, Dec. 10, at $244.09, up a solid 39.3% since beginning 2018 with a low of $175.26 on Jan. 2. The year has not been without a correction, however, as after setting an all-time intraday high of $277.61 on Sept. 14, the stock declined by a bear market 25.4% to a low of $207.02 on Nov. 20. The stock is still in correction territory at 12.1% below this high, but it is now 17.9% above this low.

Analysts expect Adobe to report earnings per share of $1.89 to $1.93 when the company discloses results after the closing bell on Thursday, Dec. 13. Given the volatility for the stock since Sept. 14, a positive reaction to earnings would solidify momentum on its weekly chart. Otherwise, there's risk of a "death cross" formation on its daily chart. It's all about revenue growth and guidance.

The daily chart for Adobe

Adobe stock began 2018 well above a "golden cross" that was confirmed back on April 6, 2016, when the stock closed at $95.40. A "golden cross" occurs when the 50-day simple moving average rises above the 200-day simple moving and indicates that higher prices lie ahead, and this was obviously a successful investment strategy for Adobe.

But now, the risk is the potential formation of a "death cross," where the 50-day falls below the 200-day. The 50-day and 200-day simple moving averages are converging at $246.14 and $243.16, so a negative reaction to earnings would confirm that lower prices lie ahead. There are three horizontal lines on the chart: my semiannual value level at $205.57, my weekly pivot at $232.63 and my quarterly risky level at $268.96.

The weekly chart for Adobe

The weekly chart for Adobe will become positive given an upside move before the end of the week. To have a positive weekly chart, Friday's close would have to be above its five-week modified moving average of $243.65. The stock is well above its 200-week simple moving average of $140.85, which is also the "reversion to the mean." The 12 x 3 x 3 weekly slow stochastic reading is projected to end this week rising to 40.93, up from 34.84 on Dec. 7.

Given these charts and analysis, investors should buy Adobe shares on weakness to my semiannual value level at $205.57 and reduce holdings on strength to my quarterly risky level of $268.96. My weekly pivot is in between at $232.63.